Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

Internationalization and Capital Structure 
As Singh and Nejadmalayeri (2004) argued, traditional capital structure theories fail to explain the 
relationship between various firm-specific characteristics and consequences of financial leverage. Barton and 
Gordon (1987) were among the first to propose a strategic perspective for studying capital structure decisions. They 
argued that the relationship between diversification strategy and capital structure reflects the complicated nature of 
managerial behavior at the individual firm level. Many hypotheses and theories have been proposed to explain the 
interaction between strategic and financial decisions. The co-insurance effect was first developed by Lewellen 
(1971) based on conglomerate mergers. He argued that the default risk could be decreased by combining businesses 
of less than perfectly correlated performance to reach a higher stability of cash flow, and thereby, “debt capacity” 
would be increased. Therefore, internationalization and leverage would be positively correlated.
However, the non-redeployable asset hypothesis proposed by Kochhar and Hitt (1998) predicts otherwise. 
They argued that related diversification, such as internationalization, introduces non-redeployable firm-specific 
strategic assets. In the event of bankruptcy, debt holders can recover only a little of their initial investment because 
of low liquidating value are unwilling to invest in high firm-specific projects. Therefore, internationalization, which 
speeds up the accumulation of firm-specific strategic assets, is negatively related to leverage. This rationale is 
supported by Titman and Wessels’ (1988) findings that a firm’s leverage was negatively related to a product’s 
uniqueness and the degree to which it required specialized service. The assumption that internationalization 
introduces non-redeployable firm-specific assets would hold especially well for hotels that employ franchise, 
strategic alliance, or management contract models for internationalization. Through these methods, hotels would 
accumulate more non-redeployable intangibles assets, such as brand equity, operational expertise, and distribution 
channels, as the level of internationalization increases.